Natural-Gas Exports 101: Beyond Ukraine

The pier at Dominion’s Cove Point liquefied natural gas plant on the Chesapeake Bay in Maryland is seen on Feb. 5, 2014. (REUTERS/Timothy Gardner)

Reuters

The U.S. government is facing pressure from all corners to ramp up natural-gas exports as a way to weaken Russia’s hand over Ukraine. To the casual observer, this debate might have seemed to come out of nowhere. So we thought it might help to break it down for you.

People pushing natural-gas exports say we have plenty of natural gas, but it seems like just a few years ago we were worried about running out. Where did all this gas come from?

The one-two technology punch of horizontal drilling and hydraulic fracturing (“fracking”) lets companies tap deep into previously unreachable shale formations in many parts of the country, including North Dakota, Pennsylvania and Colorado, to extract oil and natural gas. As a result, we’re now producing more natural gas than ever before and more oil than we have since the mid-1990s. That’s prompting a debate about how much of these resources we should export. Natural gas import facilities built over the past couple of decades are now being converted to export facilities.

Why are exports of natural gas such a hot topic in the Ukraine crisis, but not oil?

The difference is in how they’re priced. Oil is priced on a global market, while natural gas is priced on a regional basis. Russia has used its relative monopoly—within Europe it supplies six nations with 100% of the gas they consume, and it supplies seven nations with 50% or more—as leverage over the region, and in some cases it’s gone so far to cut off gas resources to these countries when it wants to flex its muscle. In the U.S., prices are dirt cheap compared to Asia and Europe, so Europe sees the U.S. as an attractive source for natural gas. Such exports would have the added strategic benefit of reducing Ukraine’s dependence on Russia.

Do we export natural gas right now?

Small amounts are exported via pipeline to Mexico and Canada, and an even smaller amount is liquefied and exported via ships. In 2013, Mexico and Canada were also the only recipients of liquefied natural gas, according to Energy Information Administration data.

You lost me at “liquefied.”

Loading this fuel onto a ship to export across the ocean requires turning natural gas, odorless and invisible in its natural form, into a liquid that can be more easily shipped. Machines called heat exchangers are used to convert the gas into a clear, colorless liquid. A coolant, chilled by giant refrigerators, absorbs the heat from the gas and cools it down to -260 degrees F, which shrinks its volume by 600 times. The machinery that makes this possible is massive and requires billions of dollars to build.

Why don’t we export more natural gas, since we have so much of it now?

A law dating back to 1938 restricts such exports. For the 20 countries that are free-trade partners with the U.S., such as Mexico and South Korea, the law requires the Energy Department, which has primary authority over energy exports, to automatically approve applications to export natural gas. For countries that do not have free-trade agreements with the U.S., which happen to be the ones who want our gas the most (i.e., Ukraine and other European nations) the law says the Energy Department must first determine whether it’s in the “public interest.” This means DOE must determine whether exporting natural gas to these countries serves the U.S. interests, weighing factors like the economy, environment and national security.

Current U.S. law is based on this idea of energy scarcity, not abundance. When we thought we had few resources, we didn’t want to export it away. Washington policymakers—and their laws—have not caught up to the oil and natural gas boom yet.

What’s the big controversy? I thought exports were generally a good thing?

As a general rule, exports usually are. When energy prices are involved, things get complicated. Some people, mainly Democrats and big U.S. consumers of natural gas, worry that exports will force up gas prices in the U.S., squandering a competitive advantage. President Barack Obama is trying to find the right balance between allowing exports without substantially raising prices, now among the lowest in the world. Remember, domestic prices were triple what they are now less than 10 years ago. Don’t even get us started on the politics of exporting crude oil, which we mostly ban right now.

So, we are planning to export more natural gas, right?

Yes, more than 20 applications from the country’s energy companies are pending before the Energy Department for approval to countries that aren’t free-trade partners with the U.S. Of those 20, DOE has conditionally approved six. The 1938 law allows, but doesn’t necessarily require, DOE to take its time reviewing whether each application is in the public interest. The Obama administration has opted to take its time—a few months for each application—to decide.

Conditionally approve? You mean that’s not the final sign-off?

Not quite, but it is the biggest federal hurdle. The Federal Energy Regulatory Commission also must review and approve the export. Just one company, Cheniere Energy, has won final approval from the government to export natural gas, and it expects to begin doing so in late 2015.

Once these projects get final approval from the government, does that mean they will definitely export natural gas?

No, it merely gives companies the right to export it, but they must still secure contracts with companies in other countries that want U.S. gas. In a few years, global natural-gas market conditions may change companies’ decisions on whether or to what extent they export gas. Remember, six years ago companies were seeking to import natural gas.

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